7.2.2.5 Critical Assumptions in Studies of Ancillary Benefits and Co-benefits

Policies aimed at mitigating GHGs, as stated earlier, can yield other social
benefits and costs (here called ancillary benefits and costs), and a number
of empirical studies have made a preliminary attempt to assess these impacts.
It is apparent that the actual magnitude of the ancillary benefits or co-benefits
assessed critically depends on the scenario structure of the analysis, in particular
on the assumptions about policy management in the baseline case (IPCC, 2000b;
Krupnick et al., 1996; Krupnick et al., 2000).5 This implies that whether a
particular impact is included or not depends on the primary objective of the
programme. Moreover, something that is seen as a GHG reduction programme from
an international perspective may be seen, from a national perspective, as one
in which local pollutants and GHGs are equally important.

A second point is that the economic accounting of ancillary benefits depends
crucially on assumptions about the demographic characteristics, regulatory regime,
and available technology and how these will evolve. For example, consider the
case in which a government imposes a cap on emissions of sulphur. If a GHG mitigation
programme is introduced it may reduce the associated amount of sulphur produced,
but other activities may take up the slack and so result in no net change in
emissions. Alternatively, consider the situation in which the government has
a tax on emissions. If the tax is set equal to the marginal damage from sulphur,
a small mitigation programme will not generate any direct benefits in terms
of sulphur reductions (the value of the reductions is exactly matched by the
loss of charge revenue). As a third example, consider the case in which the
regulator has a plan to tighten the controls on local pollutants. Any GHG mitigation
programme that reduces the levels of these emissions has then to be valued relative
to the costs of achieving the dynamic baseline, and not in terms of the benefits
of reduced emissions themselves. To sum up, the valuation of ancillary and/or
co-benefits requires the policymaker to look not only at the external costs
of the pollutants, but also at the net costs and benefits of measures being
introduced to deal with them.

Externalities do not necessarily arise when there are effects on third parties.
In some cases, these effects may already be recognized, or internal,
contained in the price of goods and services. Consider a stylized example, such
as damages to vehicles in an automobile accident. If each driver is fully liable
for damages to other vehicles and one can reliably assess fault and enforce
liability, the damage in an accident would not be an externality because the
party at fault would fully recognize the costs. Only if the drivers are not
fully liable, or if fault cannot be established, or if liability is not enforceable
is there a justification for treating the damage to vehicles in the example
as an externality. The key idea is that such exceptions constitute a deviation
from ideal institutions. In economic vocabulary, this is referred to as market
failure. For damage to be considered an externality from the viewpoint of economic
efficiency, some kind of failure in markets or other institutions that causes
individuals to fail to take into account the social costs and benefits of their
individual actions should be identifiable. From a practical perspective, it
is also important that such failures result in an important misallocation of
resources.

A full discussion of the empirical relevance of ancillary and/or co-benefits
is provided in Chapters 8 and 9.